Analysis of Indian Rupee against US Dollar (Essay Sample)

Name: Tutor: Date: Course: Analysis of Indian Rupee against US Dollar There has been a great deterioration of the Indian Rupee from 2006 to 2010. The sharp depreciation of the Indian currency has led to difficulties in the transition if Indian domestic economy that has been accompanied by a period of high inflation, low growth as well as the widening of the account deficit (Araf 128). During the period, the currency plummeted to an all-time low close to 70 dollar mark. The rupee remained down nearly 50% in the period of five years ending with 2010. That slide in the rupee has got a direct link to global factors and particularly due to the strengthening of the US dollar as well as the signal from the US that it is likely to start down spending which is a stimulus. However, the low rate of local economic growth over the five years together with weak investment cycle has contributed to the poor performance of the Indian currency. Over that period of five years, the Indian Foreign Exchange Market ended up undergoing great changes. The changes in the Foreign Exchange Market are paramount in the substantial volatility of the Indian Rupee that caused the depreciation of the currency against major currencies that have been dominating in the international market. Several macroeconomic variables have thus led to the acute variations in the exchange rate of Indian currency against the US dollar (Kar and Sarkar 52). The forceful and significant deterioration in the Indian Rupee's exchange rate has resulted in some sectors being badly affected. Heavy import companies that have got little relative exposure on export have been victims of Rupee turmoil. The companies that have been at the top of the list of the highly affected include Petroleum companies, IT giants, and the automotive manufacturers. A continued spell of the Rupee's weakness has the likelihood of widening the account deficit in India that has been among the greatest concerns for the country over the period of five years. The increased depreciation of the Indian currency during the period resulted in uncertainty in the business environment. Moreover, volatility in the pair of USD/INR comes along with additional risk for corporate that has got substantial exposure to the expenses and incomes of foreign exchange (Sharma and Setia 321). An Exchange-Traded Funds (ETFs) is a fund investment holding assets among which is commodities, stocks or even bonds and is traded on the stock exchanges. ETFs are in most of the cases attractive investments due to their reduced costs a together with the efficiency of tax. They are among the most popular types of exchange-traded product. ETFs have continuously gained favor in the financial markets globally (Kar and Sarkar 69). For instance, Foreign Institutional Investors (FIIs) to be specific have been using ETFs for the purpose of gaining exposure in the emerging markets. In India, the presence of ETFs has continued to be felt. Among the disinvestment modes that Indian government has proposed for public sector undertakings (PSUs). As can be noted, several India-specific ETFs that have been in existence in US that includes iShares MSCI India ETF, PowerShares India Portfolio and WisdomTree India Earnings Funds has been concentration on Indian stocks exclusively. The offshore equity funds' assets and the India-focused ETFs were USD 55.84 billion in 2010. ETFs come along with some advantages as compared to the traditional mutual funds. For instance, they have reduced expense ratio, transparency, tax efficiency, flexibility in trading not to forget the exposure to diverse classes of assets (Karuthedath and Shanmugasundaram 78). The expense ratios of the mutual fund are higher than those of ETFs a result of entry and the exit loads. It is worth noting that In India, the country has banned mutual funds entry loads and the exit funds are non-existence. Thus, EFTs can be traded just like stocks all the day long while accessing of the open-ended mutual funds is only possible at the end of the day. For the period of five years ending with 2010, India has had an interesting experience with the movement of its currency against US dollar. India has been the only nation that has remained isolated from globalization's tidal wa...